20160120-三星证券-Back_to_basics_-_Focus_on_fundamentals_in_1H_50页_4mb

Sector Update Summary - Steel/Nonferrous Metals (Neutral)

Core Content

This document provides an analysis of the performance and outlook for Korean steel and nonferrous metal companies as of January 20, 2016. It outlines the current market conditions, earnings forecasts, and investment strategies for key firms in the sector, including Posco, Hyundai Steel, Korea Zinc, Poongsan, Seah Besteel, SeAH Steel, Daehan I&S, and KISCO.

Main Points

4Q Performance Overview

• Earnings Deterioration: The combined 4Q operating profit estimate for the eight firms was reduced by 11.2% to KRW1.19t, 6.2% below the consensus.
• Factors Affecting Earnings:
  • Steel and nonferrous metal ASPs fell.
  • Unfavorable supply-demand dynamics and forex rates.
  • Korean furnace firms saw a drop in profits due to steel price declines and auto-use steel price cuts.
  • Nonferrous metal firms also experienced a decline due to low LME prices and forex rates.
  • Rebar makers saw improved operating profits due to low scrap prices and widened spreads.

1H Outlook

• Positives:
  • Restructuring and Forex Effect: The potential for restructuring in the industry, particularly in China, and the effect of the weak won, which benefits nonferrous metal companies.
• Negatives:
  • Anemic Demand: Continued weakness in Chinese manufacturing PMI and real estate data, which are key drivers of global demand for steel and nonferrous metals.
  • Downstream Sectors: Weakness in Korean downstream sectors, particularly the auto and shipbuilding industries, which are crucial for steelmakers.
• Investment Strategy: Focus on firms with stable fundamentals and attractive valuation multiples rather than higher valuations. A trading-buy approach is advised for firms with strong P/B ratios or technological capabilities.

Key Firms Analysis

Posco (005490 KS, KRW165,500)

• Recommendation: SELL
• Target Price: KRW230,000 (39% upside)
• 4Q15 Performance:
  • Sales increased by 3.6% q-q to KRW14.5t.
  • Operating profit fell by 21.7% q-q to KRW510.8b, missing consensus by 5%.
• Reason for Decline: Narrowing steel spreads and forex rate differences.
• 1Q16 Outlook: Earnings may improve due to rebound in Chinese steel prices, which could widen spreads.
• Investment Points: Industry turnaround and restructuring implementation.
• Dividend Yield: 4.8%

Hyundai Steel (004020 KS, KRW46,750)

• Recommendation: SELL
• Target Price: KRW65,000 (39% upside)
• 4Q15 Performance:
  • Sales and operating profit remained stable.
• 1Q16 Outlook: Earnings may improve as Chinese steel prices trend upward.
• Investment Points: None specified, but a trading-buy approach is advised after 4Q results.

Korea Zinc (010130 KS, KRW430,000)

• Recommendation: BUY
• Target Price: KRW650,000 (51.2% upside)
• Key Factors:
  • Benefits from a weak won.
  • Strong net cash holdings and free cash flows.
  • Technological prowess and strategic options.
• Investment Strategy: Top pick due to its fundamentals and valuation.

Poongsan (103140 KS, KRW23,700)

• Recommendation: SELL
• Target Price: KRW28,000 (18.1% upside)
• 4Q15 Performance:
  • Operating profit fell by 9.8% q-q.
• 1Q16 Outlook: Potential for earnings improvement with steel price recovery.

Seah Besteel (001430 KS, KRW24,650)

• Recommendation: SELL
• Target Price: KRW30,000 (21.7% upside)
• 4Q15 Performance:
  • Operating profit fell by 24.5%.
• 1Q16 Outlook: Earnings may improve with steel price recovery.

SeAH Steel (003030 KS, KRW49,950)

• Recommendation: SELL
• Target Price: KRW58,000 (16.1% upside)
• 4Q15 Performance:
  • Operating profit fell by 8.1%.
• 1Q16 Outlook: Earnings may improve with steel price recovery.

Daehan I&S (084010 KS, KRW7,650)

• Recommendation: SELL
• Target Price: KRW9,500 (24% upside)
• 4Q15 Performance:
  • Operating profit fell by 17.2%.
• 1Q16 Outlook: Potential for earnings improvement with steel price recovery.

KISCO (104700 KS, KRW36,550)

• Recommendation: SELL
• Target Price: KRW45,000 (23% upside)
• 4Q15 Performance:
  • Operating profit fell by 1.6%.
• 1Q16 Outlook: Potential for earnings improvement with steel price recovery.

Key Information

• Market Conditions: Unfavorable supply-demand dynamics and weak steel prices contributed to 4Q earnings declines.
• Valuation Metrics:
  • P/B (2016E): Posco (0.3), Hyundai Steel (0.4), Korea Zinc (1.5), Poongsan (0.6), Seah Besteel (0.6), SeAH Steel (0.4), Daehan Steel (0.8), KISCO (0.3).
• Earnings Forecasts:
  • Posco: 2016E EPS growth of 62.1%.
  • Hyundai Steel: 2016E EPS growth of 0.5%.
  • Korea Zinc: 2016E EPS growth of 5.8%.
• Investment Strategy: Investors should focus on firms with strong fundamentals and attractive valuations, especially those benefiting from the weak won and strategic cash reserves.

Summary of Key Charts and Tables

• Chart 1: China: HRC-iron ore spread
• Chart 2: China: Crude steel production growth
• Chart 3: China: HRC price growth vs crude steel production growth
• Chart 4: China: GDP growth vs PMI
• Chart 5: China: PMI vs HRC price growth
• Chart 6: China: HRC price growth vs real estate price growth
• Chart 7: China: Construction start area vs HRC price growth
• Chart 8: China: Real estate sales volume growth vs crude steel production growth
• Chart 9: Nonferrous metal prices: Zinc vs lead vs copper
• Chart 10: Precious metal prices: Gold vs silver
• Table 1: Steelmakers: Global peer valuation
• Table 2: Nonferrous-metal firms: Global peer valuation
• Table 3: Steel/nonferrous metal firms: Forecast revisions
• Table 4: Steel/nonferrous-metal firms' results: Samsung Securities forecasts vs consensus

Investment Recommendations

• Korea Zinc is highlighted as a top pick due to its weak won benefit and solid financial position.
• A trading-buy approach is advised for other BUY-rated firms after the announcement of 4Q results.
• The sector is expected to see limited upside in the short term due to weak demand and ongoing restructuring efforts.